-  We maintain our HOLD recommendation for Wah Seong Corporation, with an unchanged sum-of-parts-based fair value of RM2.16/share, which implies a rolled-forward FY14F PE of 16x – at parity to the oil & gas sector.

-  We maintain Wah Seong’s FY13F-FY15F earnings despite its disappointing 1QFY13 loss of RM2mil as the group may stage a rebound in 2HFY13 with the commencement of its high-margin US$198mil (RM611mil) Statoil pipe-coating contract, which was awarded earlier in February this year.

-  We had already forewarned that Wah Seong’s 1HFY13 results would be weak in our previous reports. As the Statoil contract will only commence in September this year, we understand that the group’s earnings may only slightly improve in 2QFY13.

-  But the group’s earnings recovery is only likely to materialise in 3QFY13, with our channel checks indicating that management still maintains its internal FY13F target profit of RM100mil, which is in line with general consensus but 19% above our forecast.

-  Recall that the Statoil contract involves anti-corrosion coating, internal flow coating and concrete weight coating for 520km of pipes in the Polarled Development Project, with completion slated in 2015.

-  Wah Seong’s 1QFY13 loss stemmed largely from insufficient revenue from the oil & gas division to cover its fixed operating costs given the completion of its pipecoating jobs – Australia-based APLNG and domestic projects - during the quarter. This caused the oil & gas division’s revenue to drop 17% QoQ and 37% YoY to RM156mil.

-  The group’s order book was flat QoQ at RM1.5bil currently (See Chart 4), which means that Wah Seong managed to secure small orders around RM400mil. As this order book represents only 0.7x our FY13F revenue, group will need to re-accelerate its order replenishment to meet market expectations.

-  We understand that the group is currently bidding for more tenders, potentially RM4bil. This includes domestic projects such as the North Malay basin, which could be worth RM200mil-RM300mil and may be awarded soon.

-  While Wah Seong also hopes to secure the high-margin Malikai deepwater pipe-coating job as well, we understand that its main competitor, Bredero Shaw, may be involved in the tender.

-  The stock currently trades at a fair FY13F diluted PE of 18x vs. the sector’s 20x. Uncertainties over the group’s 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest in the near term.

Source: AmeSecurities